Testing the Stability of the Canadian Phillips Curve Using Exact Methods

Postulating two different specifications for the Canadian Phillips curve (a purely backwardlooking model, and a partly backward-, partly forward-looking model), the authors test for structural breaks in the parameters of the equation. In each case, they account for the possibilities that: (i) breaks can be discrete, or continuous, and (ii) available data samples may be too small to justify using asymptotically valid structural-change tests. Thus, the authors use recent testing procedures that are valid in finite samples, applying the Dufour-Kiviet (1996) methodology for discrete-type breaks, and the Dufour (2002) Maximized Monte Carlo test method for continuoustype shifts. The second test accounts for nuisance parameters that appear only under the alternative. The proposed alternative is a Kalman-filter-based time-varying-parameter specification, with coefficients that follow random walks. The authors find evidence for linear and non-linear breaks, the latter being characterized by continuous and unpredictable-type shifts in the inflationdynamics coefficients. JEL classification: E31, E37, C15, C52 Bank classification: Econometric and statistical methods